DXP Enterprises Inc (DXPE) 2007 Q3 法說會逐字稿

Good afternoon, my name is Jeannie and I will be your conference operator today. At this time I would like to welcome everyone to the DXP Enterprises Incorporated third-quarter 2007 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you. It is now with great pleasure to turn the floor over to your host Mr. Mac McConnell, Senior Vice President of Finance and CFO. Sir, you may begin your conference.

Thank you, Jeannie. This is Mac McConnell, CFO of DXP; good evening and thank you for joining us. Welcome to DXP's third-quarter 2007 results conference call. David Little, our CEO, will also speak to you and answer your questions. Before we begin I want to remind you that today's discussion will include forward-looking statements. We want to caution you that such statements or predictions and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings but DXPE assumes no obligation to update that information.

Our third-quarter earnings press release is available on our website, www.DXP.com. I will begin with a summary of DXP's third-quarter 2007 results, David Little will share his thoughts regarding these results; then we will be happy to answer questions.

Sales for the third quarter increased 56.6% to $106,800,000 from the third quarter of 2006, sales by the businesses acquired since July 1, 2006 accounted for $28.7 million of the sales increase. Excluding sales for the acquired businesses sales for the 2007 third quarter increased 14.5% from the 2006 third quarter. This 14.5% sales increase excluding acquisitions, was primarily due to a 27% increase in sales for our SmartSource locations, a 13% increase in sales by our MRO service centers, and an 11% increase in shipments by our innovative pumping solutions locations.

Gross profit for the quarter increased 51.4% from 2006. Gross profit as a percentage of sales declined to 28% from 28.9% for 2006 third quarter, primarily as a result of the inclusion of $15.2 million of sales for Precision at a margin of approximately 23.1%.

SG&A increased 51.3% compared to the 56.6% increase in sales and the 51.4% increase in gross profit. As a percentage of sales SG&A decreased to 20.6% from 21.4% for the third quarter. SG&A for the third quarter of 2007 includes $500,000 of amortization of intangibles. Earnings before interest, taxes, depreciation and amortization increased 59.5% to $9 million for the third quarter of 2007 from $5.7 million for the third quarter of 2006. EBITDA increased more than sales and gross profit because of increased depreciation and amortization primarily increased amortization of intangibles.

Interest expense for the third quarters of 2007 and 2006 was essentially the same. During the first two months of the third quarter we had less than $10 million of debt. On September 10, 2007 we borrowed funds to acquire Precision Industries. At September 30, 2007 we had $3.9 million of cash and $96.9 million of long-term debt, including the current portion of long-term debt. At September 30, 2007, $25.7 million was available to be borrowed under our line of credit.

Pretax income increased 54.8% compared to the third quarter of 2006, net income increased 50.2%, net income increased less than the pretax income increased because our federal tax rate increased by 1% due to our increased level of income.

Diluted earnings per share for the third quarter increased 25% to $0.65 per share from $0.52 for the 2006 third quarter. Diluted average shares outstanding increased 18.9% primarily as a result of the sale of 1 million common shares during June 2007. Now I'd like to turn the call over to David Little.

Thanks, Mac. And welcome everyone. As you know DXP Enterprises has a three-pronged growth strategy that focuses on year-over-year organic growth, operational improvements and strategic acquisitions. If we do acquisitions right we help our organic growth by leveraging the people, products and services that the acquiring companies present plus the acquiring companies leverage DXP's products and capabilities.

DXP's mission is to be the best solution for the industrial customers' needs for MROP products and services, innovative pumping solutions and supply chain services. How are we performing? Mac talked about the financial results which we are proud of, but what drives these results? First and foremost is our associates and the associates that join our team through acquisitions. Their accomplishments are many and I will highlight a few of their successes.

First the MROP products and service segment has grown our DXP supercenters to seven and have six more in process. The Precision and Indian Fire & Safety acquisition has taken a number of stores from 44 to 96, giving us a growing national footprint. The Precision and Indian Fire & Safety have increased our product and service offering for the MROP segment, these acquisitions will increase our organic growth as we learn to leverage their capabilities across DXP and vice versa.

Innovative Pumping Solutions continues to grow its backlog and its quoting activities for capital pump projects is strong. This group has worked long and hard this year and these projects can take over a year to complete and since we recognize revenues when the unit ships, we expect this group to have a very good fourth quarter.

Supply Chain Services continues to grow and with the acquisition of Precision, which 40 plus percent of their business is Supply Chain Services, we will benchmark their best practices and we expect this to make us both better. Acquisitions, as already mentioned, Precision was an acquisition, was a great acquisition for DXP in many ways. First, we mentioned the people. We just concluded two-and-a-half days of strategic planning with 15 associates of Precision (inaudible) and Corporate and the results were great. We had openness, we had innovation, we had enthusiasm and we created a great list of opportunities for growth and efficiencies. Both companies have a passion to serve their customers and it was nice to hear both sides say they really have some smart and great guys over there.

Second, complementary products, categories and geography. Precision sells a broad range of 250,000 products listed in our catalog with over 7000 supplier lines. DXP offers 53,000 SKUs representing over 4500 supplier lines including pumps, bearings, power transmissions and general industrial supplies. Combined there are several major product categories that overlap including bearings and power transmissions, electrical, safety, industrial supplies. These represent a great opportunity to strengthen our purchasing power on these products. There are 10 product categories including pumps, fiberglass pipes, seals, wood power, power tools, linear products, lubrication, material handling, pipe housing fittings that have little or no overlay. These product categories will give us greater depth and value added services to grow our existing customers.

Complementary geographies; combined DXP and Precision represent 96 branches with less than five cities overlapping. The transaction provides a growing national footprint that will enable our combined companies to compete with national accounts business specifically on multiple product categories. Additionally the combined platform will allow us to pursue additional tuck-in acquisitions more aggressively.

Third, end market diversification. Precision's largest end market is food and beverage which represents 38% plus of Precision's sales. DXP's largest end market is oil and gas which represents approximately 40% of sales. Going forward the combined companies will have much less concentration in one industry. Reduced end market concentration and overall more balance in markets for the combined business will mean less cyclicality and seasonality for our (technical difficulty) on a going forward basis.

Fourth, combined companies will benefit tremendously from improved purchasing power. We are very excited about the purchasing synergisms which will be available to the combined companies. There are two ways we can benefit from purchasing synergisms; first we are both Precision and DXP are major buyers of a specific product, the purchasing power of the combined companies will help us drive cost savings. Second, there are certain product categories in which DXP or Precision has an individual volume or purchasing advantage which could be applied to the combined companies to generate savings. We will not know the amount of purchasing synergisms we can achieve until we negotiate our 2008 supplier agreements which are ongoing, but we estimate this could be as much as $2 million to $4 million. We will begin to enjoy these savings in mid to late 2008.

Precision is established and a market leading integrated supply company. We believe that integrated supply will continue to gain importance to our customers as they continue to drive more of their supply chains to outsource providers. Precision with 55 on-site integrations is a market leader in providing integrated supply solutions, they have been on the cutting edge of the integrated supply business for 14 years. Have maintained long firm relationships with major customers across multiple facilities. This business represents a tremendous growth as we roll out new integration to these multiple site customers.

Some of Precision's largest integrated supply customers include Avery Dennison, Whirlpool, International Truck, Coca-Cola and ConAgra. We really are excited about the growth prospects of the combined integrated supply platform. As a reference DXP currently has 19 on-site integrated supply locations, in addition to attractive growth prospects of combined integrated supply business. We will benefit greatly from the experience and knowledge that Precision brings in providing integrated supply solutions and look forward to transferring best practices from Precision to DXP's SmartSource offering.

Finally, revenue enhancement opportunities. DXP has consistently spoken of the desire to be the ultimate destination for the industrial customers. To accomplish this we will need to have products and services to support our customers' needs. The combined companies provide tremendous opportunities to drive broader product offerings into our respective customers. The combination of DXP and Precision presents an opportunity to strengthen brand impressions with both existing and new customers and suppliers while selling new products and services that independently neither business could have done alone.

Currently Precision has over 780 lines that DXP does not offer and DXP has over 449 lines that Precision doesn't offer. We clearly see opportunities to realize incremental revenue from a broader and deeper productline. On October 19th we acquired Indian Fire & Safety, a profitable safety service company which complements our safety service offering in Odessa and Farmington, New Mexico. We will continue to look for additional possible acquisition opportunities which add complementary geography, customers, products and services. We are excited about the opportunities that Precision and DXP create together, we look forward to a strong fourth-quarter and to 2008 with confidence that our three prong growth strategies are generating substantial market share gains, sales growth and increased profits.

Thanks and we are now open for questions.

(OPERATOR INSTRUCTIONS) Matt Duncan of Stephen's Insurance.

Good afternoon, David and Mac, and congrats on a great quarter. First question I've got for you guys, I know in the fourth quarter David I think you referred to this a little bit, you're expecting a very strong quarter there from Innovative Pumping Solutions. You've got one very large project that is supposed to go out during the quarter. What is your degree of confidence right now that that project is indeed going to ship?

We are confident that it's going to ship, it is roughly an $11 million to $12 million job as you might be aware of. And we have a daily conference call -- not me but another person heading up Innovative Pumping Solutions, David Vinson -- has a conference call at 3:00 everyday to make sure there is no snags. The customer, the good part is the customer really wants the product before the end of the year and inspectors are over there daily making sure there is not any surprises. So everything looks like a go so far.

What is your current expectation of around what date that should ship? If I remember correctly it is kind of first-half of December, is that still the timeline?

Yes.

Okay. I noticed you strayed away from giving guidance and maybe you'd rather continue to do that, but can you give us any kind of comments on what your expectations are for the fourth quarter? I think last time you had said 36% growth I believe but that was before the Precision acquisition, so obviously it should be much better than that now. Just kind of in general terms can you talk a bit about what maybe your revenue expectations are for the quarter and maybe earnings as well?

We think it's going to be a good quarter and we think there's always and little bit to worry about the -- how it effects the holidays in November and December but all our salespeople are telling us that business continues to be good.

To add to that first of all, we are not going to give guidance. But to add and just give you a feel for things, we did have a little slowing of the service centers back in June, since that time each month the service centers have picked up and they are projecting that they think that will continue through the rest of the year. Innovative Pumping Solutions has worked hard and diligently all year and as we don't recognize income until it ships, I'll assure you it affects their pay so they are all wanting to get all the jobs out they can before the end of the year. Not to say we don't have a backlog, it's pretty substantial going into next year.

And then B2B has had -- they don't really have any big elephants that they are killing right now. But they've added one more location and so they will have a slight improvement over previous quarters and then it will be a pretty large improvement over a year ago. But a slight improvement over third quarter.

Okay, fair enough. Mac, on the Precision acquisition was it accretive, dilutive or neutral to earnings this quarter?

It was mildly accretive and mildly means about $50,000 pretax.

So not even quite $0.01 then.

Not even a penny.

What is your expectations there for the fourth-quarter? I know you guys said at the time that acquisition you thought it would be neutral for the year but obviously you're going to have a much higher revenue dollar amount there for Precision in the fourth-quarter. So do you now think maybe it is slightly accretive this year by a $0.01 or $0.02?

I would think the best estimate at this point is sort of the same as it was for the third quarter just right there at breakeven.

Okay and then build off of that into next year as you ramp up some of these new integrated supply builds that they are working on?

That is correct.

How are the ramps of those two dealers going at ConAgra and Hershey, how are those integrated supply ramps going at Precision?

I think they are going fine. I think ConAgra is going slower y than what they had initially hoped and Hershey's is going faster than what they initially planned.

Okay.

The reason for that -- a little more detail -- the reason for the ConAgra going slower is ConAgra wants us to have two teams ready for them at all times because they are one of these hurry and wait things. But at the same time they want to install the implant stores at the same time they convert to SAP. And as we all might suggest SAP is not an easy conversion for companies. So Precision is looking at going to ConAgra, they've actually already gone to ConAgra and said, look, you are slowing us up so we are going to move these teams from availability to installing Hershey sites.

Okay. And ConAgra was okay with that?

They'd like to have their cake and eat it too but we can't just sit around and do nothing.

Sure, absolutely.

I mean it is their fault, it's not ours.

Okay, looking at the acquisition pipeline you guys have just closed a couple very nice acquisitions. Is there anything else in the pipeline that we should be keeping our eyes out for?

There is always acquisitions in the pipeline.

So you guys are still working on some stuff then?

Yes.

Yes.

Okay. And then one last housekeeping item and I will jump back in queue. Mac, can you give us the breakdown in sales between Innovative Pumping Solutions, service centers and integrated supply?

SmartSource -- do you want this with or without acquisitions?

I guess just the totals and you guys gave us -- I guess you gave us the organic growth rates. Maybe both if you got it handy.

Including all the acquisitions, SmartSource, supply chain category B2B was about 16.7 million, Innovative Pumping Solutions was about 16.6 million for the quarter and MRO was around 73.5 million.

Okay. What were those numbers then before acquisitions, rather?

Supply chain was about 10.2 million, SmartSource after backing out Precision; and Innovative Pumping Solutions was the same, 16.6 million. And I can tell my schedule has a bad number in it the way it was -- after you can probably do the math.

Fair enough, yes, we can get it from there. Appreciate the comments guys, and congrats again on a nice quarter.

Paul Resnick of Dutton Associates.

Great quarter. Just one quick question. I think everything is pretty well covered here. In the incremental revenues from acquisitions, how much of that was Precision?

15.2 million.

15.2, very good. That is the only question I had.

Richard Nelson of J. Giordano Securities.

Good afternoon, that was a heck of a quarter. Just a couple of questions. You've had a month experience with the $96 million in debt, is your interest cost working out to about 7.5% per annum at this point?

That is a good question; I guess it is lower than that.

Okay.

LIBOR has come down some -- I mean since we entered into the deal, prime came down 50 basis points and LIBOR I am trying to remember what it was. I mean LIBOR has clearly come down too.

LIBOR is about 5.3 or so.

That has come down.

LIBOR plus 125, but we don't borrow everything at LIBOR.

Right, right. I noticed that your tax rate kind of inched up a bit, is that what we can expect going forward?

Yes. We are higher than last year because really our federal tax rate changed.

Right.

Precision probably bumped it up just a tiny amount because they are in some more high tax, higher tax states.

Okay. The last question I had, it's really a general question. Are you seeing any pushback out there as far as demand is concerned? Are any clients cutting back on their spending at all or is just that they are still going pretty strong?

We don't see any markets that are declining, okay? I think we see a few markets where the growth rate of that market might have been, if it was 10% or 15% or whatever percent it was that there is a little slowing down in certain markets on the growth rate. But we don't see anything going -- in our markets we don't see anything declining.

Okay. That is all I have. Everyone else covered the other questions I had, so again, congratulations.

Thank you.

(OPERATOR INSTRUCTIONS) Holden Lewis, BB&T.

Thank you, good afternoon. The MRO if I heard correctly your MRO growth rate organically was 13%, is that right?

That is correct.

Now that is a fair bit better I think than what you had seen in the preceding quarters if memory serves. Can you talk about why you might have seen that step up, what was the catalyst to that?

It has been -- year-to-date it is 11 something --

For the quarter it was -- (inaudible) year-to-date.

I believe it is 11 something for the year and it was 13 something for the quarter. We really have been on a growth track all year, again mostly because of our supercenters adding products to existing branches and the growth that we are generating there. The only thing that was a blip was the second quarter on June we had an unexplained slowness in our day-to-day business and we are not sure why that happened. But since that happened it has all picked back up again.

What areas whether it be market or product, what areas slowed down in June and has visibly reaccelerated?

It was strictly maintenance, repair and operating products, services continues. But it was the products just the bearing and PT side, the safety side. I'm not sure we saw a slowdown on pumps but just the maintenance, repair and operating products.

Yes, mill supplies, etc.

I think you were up 21% in Q1, 4% in Q2 and then this is the 13%. So you think that this kind of number is sustainable? It seems more normal to you?

Yes, except I don't think year-to-date is 11% -- I am just trying to remember -- what do you think it is?

I think it is 4%.

On MROs?

Yes.

That is why I was sort of curious about the degree that it had stepped up, whether it was just a (inaudible) or whether you saw something either in markets or in products that lurked? (inaudible) when you see some of your markets are all growing but maybe at slower rates. Those are the things I'm trying to get a better feel for.

Right. I think one of the more significant ones that we can't really explain that has slowed a bit is the oil and gas market. Drilling -- there is a few less drilling rigs out there, doesn't make any sense obviously with $90 a barrel oil, but some of the oil companies have just slowed down their pace. I might be happy with this pace for a long, long time so --

That is one of the markets that you are kind of seeing slowing down a bit?

Right.

Fair enough. Now the integrated supply side, I think if I remember correctly -- you added in -- the total number of integrated supply sites with Precision was 71. I think that is how you would have started out the quarter. Would you have added or lost any during Q3 on sort of an aggregate basis?

DXP added I believe added one, one site that was the Dover Company -- SmartSource location. And you know what -- we don't have a -- I know that Precision is working on multiple sites. They have five teams and I know they are all fully engaged, I don't know if any sites came online. Do you know Mac?

I am trying to think there was one, (inaudible)

So that 52, does that include sort of what they are trying to bring up with Hershey and ConAgra?

First of all it was 55 and 19, which is 74. And the 19 includes the one we are talking about for DXP. What I don't know is if I would ask them how many operational sites they have, whether Precision would add to that number or not. I don't know that.

Okay, so the 19. DXP would have started out with 18; it would finish up at 19 and we should assume that Precision is 55 at the beginning and the end of the quarter?

Right.

Yes.

The latest (inaudible), okay. The International Truck, at least some of those plants have gone on strike. I know it's a Precision customer, you just mentioned it. Any feeling if that is going to have an impact, not have an impact, more or less than you thought might be the case?

International Truck has been an impact on them this year. They have not purchased as much as they have in the past. I know that. And then I know that they have talked to them and two things are going to happen. One is, they think that the business is going to pick up next year, but more importantly is they think they're going to get their engine division. So when you say international and I didn't -- I've not heard whatever plants are on strike are on strike. Is that something recent?

It was in AMM this morning.

Okay, that is recent, okay. If that is planned that they are serving it will have an effect.

But will it be a material effect or is it a relatively small number?

When we inquired earlier about that issue they thought it was a relatively small number.

Okay, good. And then lastly. Can you talk about what the margin would have been absent -- the gross margin would have been absent the acquisitions? Do have an organic number for that?

I don't have an organic number for all acquisitions, I have an organic number -- I have the number of backing out Precision.

Okay, if you just speak to that, what that number was.

28.75%.

Okay. So gross margin was sort of flattish excluding Precision. Any moving pieces in there that we should be aware of, any sort of negatives or positives in the quarter? They obviously netted out, but what are the moving pieces that got you there?

Some of our acquisitions had pretty good margins and one of our acquisitions, one in welding supply business had low margins; so there is two that sort of netted out. I mean those acquisitions were done last October and November.

Okay. But in terms of mix where you had, it looks like relative growth out of the Integrated supply business which tends to be a lower margin business, right, and that is organic?

Yes.

So that would be a natural drag. So you must have had something in there that pulled it up. What were the positive deltas?

I guess the positives is Innovative Pumping Solutions was up 11%. And the fact that the MRO is up 13.

All right, thanks. I will jump back in the queue.

At this time there appear to be no further questions. This concludes today's DXP Enterprises Incorporated third-quarter 2007 results conference call. You may now disconnect your lines at this time and have a wonderful evening.